Essay on islamic banking

Essay on islamic banking

Islamic Banking Essay,Key Learning Points

WebThe revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in At the same time financial WebAug 22,  · Islamic banking was established in Malaysia in Islamic banking products and services should come under the Islamic Banking Scheme (IBS). Kuwait WebAug 6,  · The main source of Sharia law is the al Quran, which prohibits any money that is far above the principle amount in the lending business by terming it haram and hence WebFeb 21,  · Such Islamic banking, may not be termed as perfect, but can provide us with a shelter from interest based transactions for the time being, and might support us in WebNov 19,  · Consequently, Islamic finance is a banking technique that comprises a conglomerate of fairness, sharing, profit, loss, and real operations, which articulate ... read more

If not, then we should better understand the principle that it is the substance and legal form of the transaction that makes it Halal or Haram and not its pricing, rate or the cash-flow model or the institution, or even the environment that offers such transaction. This issue, however, needs to be addressed by the government, as well as, the market players. A strong Islamic inter-bank market will InshaAllah provide us opportunities to develop our own benchmarks for Islamic banking operations. Dealing of Islamic Banks with Conventional Banks Another strong argument against Islamic banking is against dealing with conventional banks.

These dealings are of two types i. sharing of services and commercial transactions. As far as services are concerned, where the Islamic Banks are facilitating the foreign businesses of their customer or helping out their customers to transfer the money from safe channels. For these services, the remuneration or expense of Islamic banks is service charges which are allowed by Shariah jurists, although they recommend that such interaction should be avoided wherever IFIs are available. The second argument which is much strong is regarding the commercial transactions with conventional financial institutions.

These transactions generally relate to the treasury side of the Bank whereby either the IFIs place their excess liquidity with the conventional banks or obtain financings from them to meet their own liquidity requirements. Although, most of the Shariah scholars have allowed these transactions duly considering the Shariah requirements, however, nobody can argue that it is a must to avoid all such transactions. For this purpose, however, we need to strengthen the Islamic inter-bank market and to provide further liquidity management options to the IFIs particularly, in form of strong Shariah-compliant government securities and a stable capital market with plenty of Halal investment options available.

All dealings with conventional financial institutions should remain limited to the necessities which reach the extremes of compulsion. Cost Of Being A Muslim Those who have bad memories of dealing with Islamic banks are in front-line of critics with this remark. People feel that there are serious doubts on the honesty and integrity of IFIs. On the financing side, they charge higher than conventional banks. In other words, internal rate of return on Islamic financial products is higher than the conventional products. On the contrary, it is observed that on the deposit sides they pay less as compared to the conventional banks.

In addition, it is generally observed that the expected rates, as well as, the actual rates of return offered by these financial institutions are fairly equivalent to generally slightly less than the rates being offered by conventional financial institutions. A justification against the first argument is that since IFIs are subject to the commodity risk, asset destruction and holding risks and the price risk, as well as their relevant costs e. Takaful expenses, in addition to the risks and costs that a bank faces, they are justified in their demand i. higher internal rate of return.

Nevertheless, financial experts have generally felt that even if these factors are considered, the pricing by these Banks is on the higher side. On the other side, in a profit and loss based model, it is agreeable that they assign weightage to different types of deposits in a manner that the total return on investment and financing pools is allocated amongst various depositors and the Bank working as a partner. Even then, it is generally noted that IFIs are paying less than the market. We can only hope that in near future, with increasing competition in the Islamic banking industry, this effect will minimize because of market-forces except to the extent of pricing against actual additional risk elements. Marketing Approach Of IFIs Another valid argument is about the marketing approach being used by these financial institutions, which adversely effects the public reliance on this mode.

People raising objections on the marketing approach of IFIs have two grounds for the same. Second ground is the marketing strategy in which sometimes it is felt that false statements are made for promotional purposes. An example of the same is the claim by a leading Islamic bank that all its day to day activities are monitored by its Shariah Advisor. Just imagine, if it is humanly possible, that a part time Shariah Advisor can look after all day to day activities of a full fledged bank with a number of branches even located at other cities. Another example is the claim by an Islamic mutual fund that it is the first one of its kind in the country, whereas another fund was operating in the country for around one year earlier to subscription for such mutual fund.

This issue is raised particularly by the blend of people who feel that once they enter into such location, it should look like a sacred place instead of a commercial office. You generally feel that they have over-spent on the furniture, interior-decoration and publicity stuff, which apparently, is against the injunctions of Islam. In other words, environment does not make anything Haram. Needless to mention, from Shariah perspective, you can always buy a Halal product from a store where everything else is Haram although the same needs to be avoided if other options are available. This argument, once again, has key significance from the perspective of the overall control environment of these banks with regard to the applicability of Shariah principles.

Particularly, it is astonishing when you deal with an Islamic banker, who knows very little about Islamic banking, but unfortunately, this is not very uncommon. The prime cause behind this issue is the fact that most of the IFIs have hired the conventional bankers and generally no or very little consideration is awarded to ensure that they are well conversant with the Shariah requirements with regard to the modes of finance being used by these Banks. Similarly, the IFIs do not spend enough on their resource-building for Shariah compliance and training of their staff, in comparison to what they spend for marketing. This accordingly, is a strongest need that the IFIs should allocate more and more resources for staff training and Shariah compliance.

Monopoly Of Shariah Advisors Another objection is regarding the appointment of Shariah Boards and Shariah Advisors. People have largely noted and discussed at various forums that the major contribution in this field in Pakistan is limited to a very small group of jurists most of whom relate to a single family and their pupils a single religious university. Besides this, another question is also being raised that generally the honorariums, consultancy fee and other benefits being offered to such jurists by the IFIs in Pakistan, as well as, abroad are quite high and this may jeopardize their independence. In addition, it is felt that they are the only ones who are whole and sole responsible for Shariah compliance.

They approve the products, they review the transactions and in the end; they perform Shariah audit themselves, which is, however, an indicative of a conflict of interest without any doubt on their personal independence and integrity. Most of the people conversant with the business and operations of Islamic finance do not agree with this observation, because the contribution of these people to the industry as a whole is remarkable and they deserve even more than that based on their contribution and efforts in the promotion of this industry. If you are getting benefits from their efforts, their knowledge and skills, then they should be justifiably rewarded.

Having said that, it is always agreeable that it is the right time that contributions from jurist from other schools of thought should also be sought and they should necessarily be provided opportunities to enter into the field. For this purpose, it is a good proposition from the State Bank that a jurist should not be allowed to hold more than one remunerative position as a Shariah Advisor or member of a Shariah Board. This will ensure that fresh blood gets an option to enter into the field which will eventually improve the overall Shariah compliance in the field, as well as, will help these institutions to innovate fresh products. This situation, Alhamdolillah has changed after introduction of Islamic mode of insurance Takaful in Pakistani market.

Unfortunately, there are a still IFIs who have not yet switched to Takaful while to-date three Takaful companies and a family Takaful company have commenced operations in Pakistan and now this lame excuse of compulsion can not be exercised anymore. Should We Still Prefer Islamic Banking? As a conclusion to this debate, we may say that we are required by our religion to implement a complete Islamic way of living in our individual and collective lives and the society and the government as well. The Islamic banking and financial system is a part of such system and is not construed to be applicable in isolation while other laws and customs repugnant to the Shariah requirements are still in force.

However, for the sake of our own benefits, in order to avoid interest by ourselves and providing interest-free opportunities to our brothers and sisters in Islam, we should promote and support the Islamic banking and finance in the country with all our possible efforts and endeavors. We should not try to pull legs of an infant who is just trying to take his first step towards a long journey to go. However, we should try to ensure that he commences his journey on the right way, with strong footings. Such Islamic banking, may not be termed as perfect, but can provide us with a shelter from interest based transactions for the time being, and might support us in augmenting a truly Islamic financial system, and more appropriately said, will serve as an experiment for the time when we will really be in a position to the implement the complete Islamic way of living in our beloved country.

May Allah Almighty bestow us his blessings and enable us to evolve a complete system of life in accordance with the principles of life provided by the Holy Quran and the Holy Prophet SAAWS. May Allah accept our efforts and forgive us for our mistakes in this field in our individual capacities, as well as, as a society. The purpose of this report paper is to explore the issue regarding Islamic banking institutions and banks in Malaysia. Our group chose Kuwait Finance House KFH as our bank to study. The information was gathered by conducting interview session with the manager at head quarter KFH located at Kuala Lumpur and secondary data from researches and websites.

Our group chose KFH because this bank doesn't appear to be well known by the public especially in Malaysia. In the other hand the bank declares that they are the second largest Islamic bank in the world that have main headquartered in Kuwait. Our group highlights several issues regarding the performance and the current situation that applied in their systems. This issue covers the syariah compliance, the differences between KFH and other bank, location selected and the acceptance by the public. New strategies were recommended to the bank as well to become more competitive in the Malaysian market.

The earliest form of Islamic banking in Malaysia may be traced back to September when Perbadanan Wang Simpanan Bakal-Bakal Haji PWSBH was set up. PWSBH was set up as an institution for Muslims to save for their Hajj pilgrimage to Mecca expenses. In , PWSBH merged with Pejabat Urusan Haji to form Lembaga Urusan dan Tabung Haji now known as Lembaga Tabung Haji. The first Islamic bank in Malaysia was established in In , commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme IBS. These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.

In Malaysia, the National Syariah Advisory Council additionally set up at Bank Negara Malaysia BNM advises BNM on the Shariah aspects of the operations of these institutions, as well as on their products and services. Iran enacted a new banking law in August requiring complete abolition of interest by March Sudan opted for a total change when a presidential decree was issued in , directing all banks to stop dealing with interest. The Central Bank of Sudan, on 10 December , directed all commercial banks to stop dealing with interest with immediate effect, and to negotiate conversion of existing deposit into investment deposits or any other kind of deposits in accordance with shariah.

All outstanding interest bearing advances were either to be settled through repayment or they had to be converted into one of the Islamic modes of financing. This essay was written by a fellow student. You can use it as an example when writing your own essay or use it as a source, but you need cite it. Did you know that we have over 70, essays on 3, topics in our database? Explore how the human body functions as one unit in harmony in order to life. All academic papers are written from scratch by highly qualified essay writers. Just proceed with your order, and we will find the best academic writer for you! You can order a high-quality custom essay on your topic from expert writers: EffectivePapers. References Ahmed, H. Financing microenterprises: An analytical study of Islamic microfinance institutions.

Islamic Economic Studies, 9 2 , Ahmed, H. The Islamization of economies and knowledge: A new institutional economics perspective. American Journal of Islamic Social Sciences, 29 4 , Bank Negara Malaysia Value-based intermediation: Strengthening roles and impact of Islamic finance. Implementation guide for value-based intermediation. pdf Domat, C. What is Islamic finance and how does it work? Global Finance. pdf Hussain, M. An Overview of Islamic finance. pdf Iqbal, Z. World Bank Group.

Islamic banking gets its name from its compliance to Islamic laws also known as Shariah laws governing financial transactions. Islamic law prohibits charging of rent on money that in conventional words means interest and is termed Riba in Islamic laws. The rationale behind not charging interest comes from the Islamic finance concept, which states that interest or riba encourages circulation of wealth in the hands of a few rich entities and limits prosperity to reach to the masses in the society. However, Islamic banking is not limited to interest-free banking alone but adhering to all Islamic values such as charity, profit sharing, zakat or Islamic tax collected for the destitute and not doing business in things classified as haram or forbidden under injunctions of Islam.

The first modern experiment of Islamic banking was carried out in Egypt. This experiment was not labeled as an initiative to establish Islamic banking because the idea holders feared to be labeled as Islamic fundamentalists. Order custom essay Essay On Islamic Banking with free plagiarism report. The following banks were opened up; Nasr Social Bank in ,Amanah Bank in , the Dubai Islamic Bank in , the Kuwait Finance House in , the Faisal Islamic Bank of Sudan in , Faisal Islamic Bank of Egypt in , the Bahrain Islamic Bank , and the Qatar Islamic Bank However, it is only in the last few years that Islamic banking and finance has picked up pace and Islamic economists have come up with innovative financial products that are also Shariah compliant.

Islamic finance believes that interest on consumer as well as investment or corporate loans is forbidden. It devises its rulings out of the events of Islamic history and financial transactions there in. Some salient foundations of these rulings are; the concept of profit as well as loss sharing with entities the loans are advanced to. There is no such thing as a confirmed profit in form of interest in Islamic finance. Usmani If a custodian is handed money for safekeeping he does not have limited liability but a complete liability towards the clients that handed the money or assets for safe keeping. The custodian is allowed to invest these amounts in trade and business to earn profits on it. However, is liable to share the profits with the clients according to the ratio of the share of their capital in the entire invested capital M.

Islamic financial practices believe only in asset backed financing and not in money as it does not have any intrinsic value. Therefore, many Islamic banks believe in entering a valid contract with the clients and engage in actual purchase of things such as houses, automobiles or consumer goods and later sell it out to client. It is imperative to understand the nature of Islamic financial terms of contract and sales too. Under these rulings a contract is void if it violates the Islamic principles governing economics, is not formed through mutual agreement and negotiation, is not part of the normal market transactions and benefits one party over another.

Whereas, M. Usmani describes sales in Islamic banking are considered void if they do not fulfill these conditions; have a right contract, subject matter, price and possession or delivery promise at the time of transaction The Islamic modes of financing widely used are namely Musharakah, Mudarabah, Diminshing Mushaharakah, Murabaha, Salam, Istisna, Istijrar, Ijarah and Ijarah Wa Iqtina. Musharakah is a kind of partnership where in profits are shared according to a specified ratio decided upon by the partners in a mutual contract M. The profit sharing terms of the contract should be mutually agreed to by the partners but should not allocate a fixed return to either of the partners because that is classified as interest.

On the other hand, losses are to be shared according to the initial capital invested in the venture. If compared to the conventional American banks a fixed rate of return is charged termed as interest or markup rate on any capital lent out. Furthermore, American banks do not share liability or losses if the venture that borrowed money accrued losses. However, in Musharakah it is responsibility of bank to share the losses as well. The return of the bank is linked with the profits generated by the venture, if profits are more it will get more profits but the Islamic bank cannot impound these profits but has to share it justly with all the depositors of the bank. This is not applicable to conventional American banks because they allocate a fixed markup return on loans and cannot therefore also take advantage of sharing profitability of the venture they finance.

Mudarabah is closely related to Musharakah but is another form of partnership wherein one partner provides the capital to invest and the other utilizes the capital in business. This is somewhat like the sleeping partner and the working partner concept in conventional banking and financial partnerships. The profit and loss sharing under this mode of finance is left upon the mutual consent of the two partners i. bank and client. However, a fixed lump sum amount irrespective of profits or losses is not allowed.

Diminishing musharaka is referred to the mode in which the financer and client have joint ownership of an asset. Apart from that the client is supposed to pay a rent on asset to the bank on basis of percentage ownership in the asset. Salam is generally used for Islamic banks to finance agricultural ventures where in a seller agrees to supply particular goods or services to a buyer at a future date of delivery i. mutually consented upon , however, the buyer the price of the transaction is completely paid at spot. In Istisnah, it is a sale transaction where a commodity is transacted before it comes into existence.

It is necessarily for manufactured goods, part or whole of payment is made in advance the bank has right to cancel the contract before manufacturer starts the work. Istijrar involves two parties, a buyer which could be a company seeking financing to purchase the underlying asset and a financial institution. It has two forms; first where the price is determined after all transactions of purchase are complete and second where the price is determined in advance but the purchase is executed from time to time. Ijarah Islamic leasing is where in the leaser who also is the owner of things transfers the use of thing to another person or the lessee for a mutually agreed time period and on a mutually agreed consideration. Ijarah wa Iqtina leasing and promise to gift is a form of leasing agreement in which at the end of the entire payment of lease the object of lease is gifted to the lessee i.

the ownership is completely transferred. Islamic banks differ from conventional American banks in many ways. Islamic banks design instruments and financing modes in the boundaries prescribed by Islamic law. Conventional American banks are not subjected to any religious pretexts that define the code of financial ethics but the laws ascertained by financial regulators of the country. American banks are promised a fixed markup rate from the loan that they lend but Islamic bank share both the profit and loss from the forwarded loan. American banks do not encompass any religious taxes to support the community but just the state taxes apply. However, Islamic banks collect the zakat Islamic tax for benefitting community and disperse it among the needy segments of the society.

Conventional Islamic banks simply lend the money and are concerned about the principal as well as compound interest payments they receive. However, Islamic banks engage partnerships with clients and partner in the losses or profits of clients. However, Islamic banks carry out project evaluation of their client because they are a partner in losses as well. In American banking system if an installment is not paid on time or defaulted a compounded interest charge is levied on it. However, in Islamic banking it is prohibited to charge any such late surcharges and care is taken to assess the actual problems faced by the defaulter.

If payment was defaulted due to genuine reasons no penalty is imposed but if it was done deliberately then a small compensation is charged. American banks may focus only their personal growth targets and revenue growths. However, Islamic banks are required to focus on growth of their partners in business i. clients and keeping public interest at heart of future objectives. American banks can borrow money from money markets easily. However, Islamic banks face constraints towards such actions because any borrowings they make have to be Shariah compliant. American banks give greater weightage to the credit ratings of their clients to assess the advancement of loans. Whereas, Islamic banks emphasize the project viability while deciding upon advancing loans.

A typical American bank while financing projects mainly functions as a creditor to its clients or debtors. On the other hand, Islamic banks become partners, investors, and sellers to their clients which depend upon the modes of finance taken up. Conventional American banks need to guarantee all the deposits they accept. However, Islamic banks only guarantee saving deposit accounts in their portfolio. Their clients have to share the losses as well depending upon the nature of the contract Rahman. bond issue, share certificate etc investopedia. Islamic banks have now ventured in securitization of Musharkah, Murabaha, Mudarabah and Ijarah.

Many countries now have Mudarbahs listed at stock exchanges to be traded in. Islamic bankers are also bringing investment funds that are compliant with Shariah laws to the financial services market. Some of the funds established include equity fund, commodity fund, ijarah fund, murabaha fund, Bai-Al-Dain, and Mixed fund. Therefore, it can be seen that Islamic banking sets its foundations in Islamic laws governing financial transparency. These are very different from conventional American banks in their economic concepts, financial products and services offered to clients. Furthermore, Islamic banking is relatively a new concept as compared to the conventional banking and economic concepts that have developed over ages. Islamic bankers and scholars are working upon deriving more products and services based upon Shariah to offer a greater range of financial products in the financial industry.

It holds appeals in its concept of community care and client care. However, the complete implementation of this form of banking on a large scale seems a questionable and daunting task. Retrieved 28th April from www. pdf Rahman, Zaharuddin A. Karachi Pakistan :Darul-Ishaat This essay was written by a fellow student. You can use it as an example when writing your own essay or use it as a source, but you need cite it. Did you know that we have over 70, essays on 3, topics in our database? Explore how the human body functions as one unit in harmony in order to life. Essay On Islamic Banking. Free Essays - PhDessay. com, May 22, Accessed February 3, com , May Abstract The rising of the Islamic banking and finance industry is a direct response to the growing awareness amongst Muslim regarding the need of alternative financial products and services that.

The impact of risk management on profitability in Islamic banks against conventional banks Introduction Background of the study Since s Islamic banks is developing on the feet and leg. The number of Islamic. The history of Islamic Banking also known as Islamic Finance dates back to the 70s, with the establishment of Dubai Islamic Bank.

Principles of Islamic Banking Essay,Arabia Research Paper

WebAug 22,  · Islamic banking was established in Malaysia in Islamic banking products and services should come under the Islamic Banking Scheme (IBS). Kuwait WebAug 6,  · The main source of Sharia law is the al Quran, which prohibits any money that is far above the principle amount in the lending business by terming it haram and hence WebFeb 21,  · Such Islamic banking, may not be termed as perfect, but can provide us with a shelter from interest based transactions for the time being, and might support us in WebEssay On Islamic Banking 1) Riba’ (interest-based transaction) is prohibited. 2) Avoidance of Gharar (uncertainty) 3) Avoidance of Zulm (opression) 4) Promotion of WebThe revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in At the same time financial WebThe basic concept of Islamic banking which is also known as 'interest-free banking' is based on basic ethical standards with just one main difference- Muslims are not allowed ... read more

Explains the sale of a portion of waqf property to develop the remaining portion. Under these rulings a contract is void if it violates the Islamic principles governing economics, is not formed through mutual agreement and negotiation, is not part of the normal market transactions and benefits one party over another. Explains that northern bank is one of the most established providers of financial services within the island of ireland, with origins dating back as far as Ijarah wa Iqtina leasing and promise to gift is a form of leasing agreement in which at the end of the entire payment of lease the object of lease is gifted to the lessee i. Cautions against using the password you've picked for your email account at any online site. Cites fsa, ukinvest.

Pay if satisfied. the information may involve its species, quantities, date of future delivery and etc. Explains that credit information from cibil, experian, equifax, and other credit hubs of good repute will be got before processing the proposal. com is a professional essay writing service committed to writing non-plagiarized custom essays, research papers, dissertations, and essay on islamic banking assignments of top quality. Thus, financial intermediation in an Islamic framework has been developed on the basis of the above-mentioned principles.